UK Board of Directors: How to Build a Culture of Compliance

UK boards lag in building a compliance culture. According to a recent survey, 55 per cent of UK leaders are overwhelmed by the risk exposure of their businesses. Corporate culture is imbued from the top down, and directors must make compliance culture a standard at the board level, including giving the Chief Compliance Officer a seat at the table. Training is essential to inculcate a corporate culture of compliance from the top to the bottom of the firm.

UK boards face unresolved compliance issues

The need for UK boards to build a culture of compliance at their companies has become critical. A January 2018 survey by the London office of law firm Baker McKenzie showed that, of more than 500 UK companies with turnover of £1 billion (US$1.4 billion) or more, 52 per  cent have unresolved compliance issues yet to be discovered by a regulator, while 57 per cent have already had a violation uncovered by a regulator. On M&A deals, 40 per cent of UK organisations admitted to uncovering a compliance issue with a new acquisition after closing the deal. Furthermore, 55 per cent of UK leaders are overwhelmed by the risk exposure of their business.

The solution: A corporate culture that supports compliance

“Our research confirms the extent to which businesses are overwhelmed by the volume and complexity of regulation in the market, which is only set to increase,” the survey notes. As compliance becomes more complex, it is more useful to create a culture in which compliance is respected on principle than to engage in box-checking exercises at every level, as a recent report by the UK Financial Conduct Authority points out.

“The rate of compliance is a function of increased awareness of how behavioural biases affect decision making. This can lead firms to develop improved internal controls on decision making to reduce the effect of these biases. It is in the areas of morality and culture that there is greatest scope for firms to act,” the report explains. “Corporate culture is imbued from the top down,” the report continues. The board must both set the standards for a culture of compliance, and then communicate it to the rest of the organisation.

“At heart, poor culture within a firm amounts to a failure of leadership. Managers influence culture through the tone they set and their expectations of staff, including the challenge of poor behaviour and of the norms and beliefs that sustain poor behaviour. There is also a responsibility to have the correct incentives, for example, to ensure that staff remuneration does not directly or indirectly promote poor conduct. Firms can bring morality to the fore when their employees take decisions, and in ways that go well beyond the occasional training on ethics that many firms require.”

The report notes the value of sending positive ethical messages that need to be consistent and regular so that they are salient at the point at which staff make decisions. “Having staff sign up to a moral code, therefore, committing to moral standards can help to engage such moral reasoning, as can ensuring that staff engage directly with consumers to see the consequences and impact of their work. In these ways there is considerable scope for firms to improve their compliance with both the letter and the spirit of regulation,” the report points out.

Top tips for creating a culture of compliance in boardrooms

To further the creation of a culture of compliance, the ComplySci platform proposes a series of steps based on leadership from Chief Compliance Officers (CCOs):

  • Set the tone from the top: Get senior people involved, starting with the boss. Not everyone is going to listen to the compliance department, but if the CEO is reinforcing a compliant culture, most employees will follow. Too often, we see executives undermining the compliance process, which, in turn, leads to a lack of respect for policy and ethics across the entire firm.
  • Give compliance a seat at the table: To reinforce the tone that is set from the top of the organisation, CCOs should be seen as senior officers and as an integral part of management. To achieve this, CCOs need to have a seat at the table on the board or executive level. This ensures that the importance of compliance is shown company-wide, and it enables CCOs to take a proactive role in the decision-making process. Nearly every decision made at the board level — from hiring executives to expanding a product suite to crafting internal and external communications — requires the input of compliance. We recommend that compliance professionals build their “seat at the table” into their program. Put it this way: If an examiner comes into a firm in 2018 and the CCO’s office is in the basement, this should immediately raise a red flag.
  • Develop engaging training programs: No one wants to sit in a seven-hour training program and be talked at. Get creative — develop methods to have people engage in a fun way, and implement a feedback loop to test for understanding and retention.
  • Create a trusted supervisory network: A successful compliance culture is predicated upon not just employee buy-in, but also a supervisory framework that employees understand and can trust. A clear line of reporting must be established, and compliance officers should have an open-door policy, with no fear of retribution.

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